How much should you pay for a business? Valuing a company (1)

How should we put a value on what a company is worth? 

There is only one accurate answer to this question - whatever someone is prepared to pay! In evaluating 'worth' we must consider a number of alternatives.

Though we often look at financial measures, we must never forget the non-financial measures too. These factors can far outweigh any financial appraisal, as it is only based on a company's past track record rather than its future potential.

When putting a value on a company, always consider more than one measure, to allow a 'reality check' on the methods being used.


Also read:

Valuing a company (1)

Valuing a company using Asset Value (2)

Valuing a company using Multipliers (3)

Valuing a company using Market Capitalisation (4)

Valuing a company using Non-Financial Measures & Balanced Scoreboard (5)

Valuing a company using Cash Flows (6)

How much should you pay for a business? Valuing a company

How should we put a value on what a company is worth?  There is only one accurate answer to this question - whatever someone is prepared to pay!  In evaluating 'worth' we must consider a number of alternatives.

Though we often look at financial measures, we must never forget the non-financial measures too.  These factors can far outweigh any financial appraisal, as it is only based on a company's past track record rather than its future potential.

When putting a value on a company, always consider more than one measure, to allow a 'reality check' on the methods being used.

Asset value

An obvious starting point for valuing a company is to look at the asset base of that organisation.  On this basis the company would be worth its net asset value.  There are some limitations to this approach:

Book value -  Accountants usually value fixed assets at what they cost, depreciated to reflect the reducing value as items are worn out in use.  Book value may not be an accurate reflection of the real value.  This can apply when land and buildings were bought some time ago, and have grown in value; or if the value of these assets has reduced significantly since purchase, due to new technologies.  There may also be a factor that has previously been ignored, such as environmental issues.  Disposal or land remediation costs could wipe out any asset value.

Normally a company will have a fixed asset register that lists all its assets, and the current depreciated book value of those assets.  A similar register might also exist for its other assets.

Working capital -  Again, we must understand whether these items are accurately stated.  Stock (inventory) is usually valued by accountants at what it cost.  This may be far more than we can sell it for, especially if it is out of date.  Debtors (receivables) is money owed to us by customers.  How much of this might be bad debt (i.e. invoices that may never get paid)?  Creditors (payables) is money we owe our suppliers.  How much has our company avoided paying to improve its cash flow?

Intangible assets - This can take the form of goodwill (the difference between what we pay for an acquisition and what the assets are valued at) or capitalised costs (such as research or start-up costs).  As there are no physical assets to underwrite these, the net assets may be overstated if these elements are high.

Investments -  There might be some investments in other companies, which accountants will value at what was paid for them, rather than their realisable value in the market.

Unstated assets - Accountants usually put no value in the books on such things as people, brands, intellectual property, market position, forward order book etc.  This means that the net asset figure alone might seriously understate the company value.  This can apply especially in service-based businesses that have few tangible assets.

Multipliers

Another simple approach is to use a multiplier to calculate a company's value.  These multipliers will vary for different industries.  One way of deciding what figure to pick for a multiplier is to analyse previous company takeovers within that sector, examining what was paid for these businesses compared to their sales or profit levels.

Caution must be taken in ensuring that the level of sales or profits in the accounting period being analysed is sustainable and does not contain one-off or abnormal conditions.

Sales multiplier

The sales multiplier uses a multiple of sales to assign a value to that company.  This could be less than or greater than 1, depending on expectations for future growth.  Sales multipliers are particularly popular in start-up companies that are not yet profitable (eg. dot.com companies).

Profit multiplier

In the case of the profit multiplier, the multiplier used tends to be greater than 1 and will be based on how many years' future profit are to be factored into the value of a business as well as expectations for future profit growth.

So if a profit multiplier is 10 was used you might expect a 10% return for the next 10 years, with no change in business conditions to pay for this investment.

Market capitalisation

The value of a company can be ascertained by multiplying the number of issued shares by the current share price.  This is known as market capitalisation.

A case for asset stripping?  The concept of asset stripping is to buy out a company's shares for less than the value of the assets and then to sell these at a profit.  This is why company directors get worried when their share price falls too low!


Balanced Scoreboard

As already mentioned, there are often non-financial considerations to valuing a company.  A scoreboard that balances financial and non-financial measures can be used to help manage a company and also help us value one.  Non-financial measures might include:

Health, safety and environment - many companies have policies relating to these factors and would seek an acquisition that might enhance their position in these areas.  This could include accident rates, environmental impact and energy usage.

Production measures - these will vary from one industry to another but might include production efficiencies, output per worker, waste levels and how up to date the production processes are.

Intellectual property - the potential value of patents, trademarks and brands.

Employees - the skills, motivation, satisfaction levels, productivity and loyalty of the people who work in the company.

Marketing - geographical coverage, customer satisfaction and loyalty, market share and potential fit with existing activities have a value that can be different for different purchasers.  The outlook for future growth might lead to an expectation of a better performance in the future, as could the rate of product and process innovation, and percentage of sales from new products.

Strategic fit - difficult to quantify, and used to justify high acquisition costs!  Companies will also claim to be able to gain synergies and cost savings through merging the two organisations.

Cash flows

When considering purchasing a company, another way to value the business is to examine what cash it will generate over a period of time.  This can be in straight cash terms not taking into account inflation, price erosion etc.  You may also wish to apply discounted cash flow principles to arrive at a net present value (NPV) for the company, or even an internal rate of return (IRR) on the purchase.

Perhaps the most useful way to value it is to estimate the economic benefits that the business will generate in the next few years and then apply the NPV process to them.  All valuations based on forecast figures are essentially educated guesses, but this analysis is likely to pinpoint the best opportunity for creating value, if the forecasts turn into reality.

Also read:

Valuing a company (1)

Valuing a company using Asset Value (2)

Valuing a company using Multipliers (3)

Valuing a company using Market Capitalisation (4)

Valuing a company using Non-Financial Measures & Balanced Scoreboard (5)

Valuing a company using Cash Flows (6)

A quick look at QL (22.4.2010)

QL Resources Bhd Company

Business Description:
QL Resources Bhd. The Group's principal activities are distributing animal feed raw materials and food related products and involving in livestock farming. Other activities include deep sea fishing and frozen food processor in Peninsular East Coast and Sabah, manufacture and sale of fishmeal, Surimi (fish paste) and Surimi-based products, as well as crude palm oil milling and oil palm cultivations. It is also involved in providing management services and operating as an investment holding company. The Group owns two independent CPO mills, which include 3,000 acres mature oil palm plantation around Tawau (Sabah) and 30,000 acres of oil palm plantation in Eastern Kalimantan, Indonesia. As at June 2009, the Group produces 2.1 million poultry eggs per day and planted 13,000 acres of oil palms. The Group operates predominantly in Malaysia.

Wright Quality Rating: DBA1 Rating Explanations
















A quick look at QL (22.4.2010)
http://spreadsheets.google.com/pub?key=tAbsXJFFkFhyH8UpFrR-Gpw&output=html


Comment:
Insiders have been regularly acquiring shares in this company.  The company has also been buying back its own shares regularly.

Understanding The Intricacies Of Price–Earnings Ratio

By Ernest Lim

Readers may be surprised why I am writing an article on price-earnings (PE) ratio, as it is one of the oldest and widely known ratios around. They are often quoted by analysts, stock brokers and readers. Most people know how to calculate a PE ratio and they know that a low PE signifies that the stock is cheap and vice versa. However, is this really the case? Should one buy a low PE stock over an average PE stock? Or should we consider other factors? These are the intricacies, which I will explore in this article.

What is PE ratio?

PE ratio means how many times current year’s earnings¹ that investors are willing to pay for the company stock. For example, according to my estimates, China Gaoxian FY10F PE is only around 3.0x. This means that investors are only willing to pay about 3x Gaoxian’s current year earnings (i.e. FY10F earnings) for Gaoxian stock. In other words, it reflects the confidence that investors have in the stock. Is this a sure signal that Gaoxian is undervalued? I will discuss more on low PE stocks in the paragraphs below.

PE ratio – how to calculate?

For readers who are unaware on how to calculate PE ratios, I have listed two usual ways below to calculate them.

• Market price of the company (i.e. market capitalization) / net income of the company; or
• Price per share of the company / earnings per share of the company

Interpretation of PE ratio

The PE ratio is meaningless by itself. We have to examine it using the following two common techniques.

Comparison with industry

We can either compare the PE ratio against that of individual companies, or against an average PE of firms in similar industry. There are two general points to note. Firstly, if the company is trading at a lower PE than its peers, it is cheaper than its peers. Secondly, different industries have different PE ratios. This is because some industries either experience higher growth rates, or stable growth rates with lower risk, thus they are able to sport higher PE ratios.

Comparison with time

The company’s PE ratio is compared against a three, or five, or a ten year time period to determine whether it is priced cheaply against its historical valuations. We should be cognizant not to use a period which is too short (i.e. < 3 years) as it may not have captured the entire business cycle of the company. Furthermore, the PE ratio may be affected by extreme events. For example, the PE ratios of most companies slumped to single digit levels between 2008 and 2009.

However, if we were to compare the ratio against a fifteen year data, it may be too long. The industry dynamics or the company’s fundamentals may have evolved over time. In my opinion, I will use either a five or ten year time period.

Reasons for a low PE

Oftentimes, I hear readers express disbelief on stocks which have extremely low PE ratios. There may be several reasons why a stock has a low PE ratio. Below are some of the reasons.

Growth – an important component

A stock with low or zero expected growth in its future earnings per share is unlikely to be ascribed a high PE ratio. Thus, PE ratios should be complemented with another ratio called “Price earnings to growth ratio”

(PEG). This is calculated in the manner below:
PEG = PE / growth rate in annual earnings per share

Generally,
If PEG ratio < 1, company is undervalued.
If PEG ratio > 1, company is overvalued.

Therefore, besides looking at PE ratio, one has to take into account of the company’s growth rate to determine whether the company with the low PE is justified.

Incompetent or dishonest management

Firstly, I believe most readers would agree that the quality of the management is critical to the long term viability of the company. If management is incompetent, it is very difficult for the company to consistently generate an above average return on equity. It is more likely that over the long term, the incompetent management may have destroyed shareholder’s value. Thus, it is justified for the stock with poor management to have a low PE ratio.

Secondly, a company which has, or just had accounting irregularities before will command a lower PE ratio. This is because investors would have doubts on its financial figures (e.g. earnings), and consequently give a lower PE ratio to the stock.

Poor communication with shareholders

Usually, an outstanding company may have a low PE, simply because investors do not understand the company well. This is due to inadequate communication between the management and the shareholders. Some companies’ management may view that it is sufficient just by doing their business well and they are unlikely to spend additional time to engage with the shareholders and the investment community. Some management may believe that value speaks for itself. However, for listed firms, it is unlikely that pure devotion to work can deliver outstanding stock returns and high PE ratios for the firms. This is because if shareholders and the investment community do not understand the companies, it is difficult for them to feel confident on the companies’ earnings and prospects, and this will affect the PE ratios that the companies can command.

Temporary downturn in the company or industry

A company may have experienced one or two quarters which is poorer than analysts’ estimates and investors may punish the share price, sending its PE to a figure which is lower than its peers. For this company, it would be good to do some detailed fundamental analysis to ascertain whether this sub par performance is permanent or temporary. If the company has just hit some temporary obstacles, which resulted in posting poorer than expected results, then it may be good to start to accumulate the stock if investors believe that the company can turn around soon.

Separately, a great company may have a low PE in an industry which is facing lackluster growth rates. This is because investors (rightfully) believe that it is generally difficult for a company to post above average earnings growth rate in a poor industry. However, there is one exception to this. If the company, such as China Gaoxian, is sporting a low PE ratio in an industry, which is starting to rebound from the trough, it may be a good idea to accumulate in this company.

PE ratio – May be subject to manipulation

Readers should be aware that PE ratio is a function of price and earnings. Earnings are based on accounting principles and thus the choice of accounting principles would have an impact on the earnings. For example, given the same assets, net income for company A will change depending on whether he uses a straight line depreciation for its assets or a double declining balance method. Thus, the quality of the PE ratio is dependent on the quality of earnings.

Conclusion

Although the PE ratio is one of the most widely known ratios around, it is pertinent for readers to understand the intricacies in the application of the PE ratio. By doing so, the PE ratio will become another effective tool in the investors’ armoury in finding good investment opportunities.

1 It depends on the type of earnings used in calculating the PE ratio. It can be historical, or current, or future earnings. In my example, I have used China Gaoxian’s FY10F earnings per share, thus the earnings used is current year’s earnings.

Ernest Lim currently works as an assistant treasury and investment manager. Prior to this role, he was with Legacy Capital Group Pte Ltd, a boutique asset management and private equity firm, as an investment manager since 2006. He received a Bachelor of Accountancy (Honours) from Nanyang Technological University in 2005. He is a Chartered Financial Analyst, as well as, a Certified Public Accountant Singapore. He is currently taking a short break before embarking on a new role.

http://www.sharesinv.com/articles/2010/04/16/intricacies-of-pe-ratio/ 


Comment:  An excellent article on PE

Your investment goals determine which stocks to include in your portfolio

The investment goals you have established are another important ingredient in determining which stocks to include in your portfolio.

• If your investment goals are primarily long-term in nature, you should build a stock portfolio that is best able to meet these long-term goals.  Choose the stocks of companies that have good long-term growth prospects.  
• If your main investment goal is to enjoy a stable source of current income, you should own stocks that pay liberal but secure dividends.  

Keep in mind that constructing a portfolio of stocks that meets your investment goals does not lessen the need to maintain a diversified portfolio.

Risk of Loss Caused by Infrequent Trading

Investment assets that are seldom traded may be difficult to sell unless you are willing to offer a price concession to attract a buyer.  It is especially difficult to obtain a fair price when you are in a hurry to sell an asset that has little trading activity.

Many stocks are actively traded and offer excellent liquidity to a seller; even when it it necessary to sell the stocks immediately.  At the opposite end of the liquidity scale, some stocks in which limited trading occurs may be difficult to sell on short notice unless you are willing to accept a price that is substantially lower than would be received in an active market.

The ownership of inactive stocks is not a great concern if you are investing for the long term.  The common stocks of relatively small, little-known companies frequently offer an opportunity to earn large capital gains.  Unfortunately infrequent trading caused by a current lack of investor interest means that you may have difficulty disposing of the stock at a reasonable price on very short notice.

• If you are investing to achieve short- or intermediate-term goals and expect that you will have to sell your stocks in the not-too-distant future, owning stocks that don't have an active secondary market is a risky investment choice.  
• You can avoid this risk by limiting your selections to stocks that are actively traded on one of the organized exchanges or in the over-the-counter market.

Risk of Loss Caused by a Company's Indebtedness

Companies that choose to finance a large proportion of their assets with borrowed money face an increased risk of being unable to meet their financial obligations.  The greater a company's reliance on debt, the more likely that the company will be unable to service the required interest and principal payments that come from debt.  A large amount of debt also tends to produce large variations in a firm's net income, which places the stockholder in a riskier position because it is more difficult to forecast earnings and dividends.

A company that relies mostly on earnings and owner contributions to pay for new assets has few fixed financial expenses to meet and is likely to be able to continue to meet its financial obligations when it encounters difficult economic conditions.

• A business with a substantial amount of debt is likely to encounter difficulties when revenues decrease.  
• Difficulties may also arise when revenues increase more slowly than the firm's management expected at the time the funds were borrowed.

If being in debt is so risky, why do most companies so readily employ this method of financing?  

• The answer is that debt allows a company to acquire more assets and grow more rapidly than would reliance solely on earnings and stockholders' contributions.  
• A company that conscientiously avoids borrowing money may have to delay its expansion plans because of the limited funds available to pay for new assets.  
• Delayed expansion may allow the firm's competitors to gain an advantage by reaching new markets or developing new products first.  
• A delay in expansion plans may also keep a firm from being among the first in its industry to reach a cost-efficient size.

Borrowing money rather than issuing additional shares of stock permits a business to expand without having to share control and profits with additional owners.  The firm also saves on future dividend payments.

• A firm that borrows $500,000 avoids having to sell thousands of additional shares of common stock on which dividends are likely to be paid in the future even if no dividends are currently being paid.  
• In addition, while dividend payments to stockholders must be paid from after-tax income, interest paid on debt is permitted as a deduction in calculating taxable income.  
• In other words, the interest expense from borrowing results in a tax benefit for the borrower.

Another potential advantage of borrowing is that debt financing will allow a company that experiences favourable business conditions to earn a higher return on the stockholders' investment.

• A decision to seek a long-term loan at a fixed rate of interest can prove to be a very wise decision if a company's productivity and revenues grow.  The fixed interest expense means that a substantial proportion of revenue growth is likely to flow down as profits for the stockholders.

The Risks of owning Common Stocks

The risk of investing is directly related to the uncertainty of the rate of return that you will earn.  The less certain the return, the greater the risk.  

The risk of an investment is especially great when there is a possibility that a large negative return (that is, a substantial loss) can result.  

Thus, common stocks are more risky than bonds, and bonds are more risky than savings accounts.  Insured certificates of deposit and U.S. Treasury bills, are considered to be virtually risk free because of the certainty of how much money will be received and when the receipt will occur.

Common stocks can be very risky investments to own for a number of reasons.  

1.  Nearly all common stocks subject investors to substantial uncertainty regarding the rate of return that will be earned.  Stock prices are extremely volatile, and it is not unusual for the market price of a common stock to move upward or downward by 30% or more during a year.

You might make the argument that you haven't actually lost 30% if you don't sell at the low price, but what if it goes lower?  In any case, for example, you paid $50 for an investment that is now worth only $35.  This represents a loss of your wealth regardless of whether you sell or keep the stock.

2.  The flow of dividend income from common stocks is often difficult to forecast because, unlike a bondholder's promised interest payments that are a legal obligation of the issuer, a company's board of directors must vote to approve dividend payments to the firm's stockholders.  In other words, common stockholders have no legal right to receive dividend payments.

• The directors of a company that encounters financial difficulties may decide to reduce or even eliminate dividend payments to stockholders.  
• Directors of a company may also decide to revise a firm's direction and reduce the dividend in order to increase the amount of money that is available for expansion.  
• Even the directors of a successful company may not increase the dividends as much as investors expect.  
• What a company may pay in dividends is much easier to estimate accurately in the near term than the long term, because it is difficult to forecast the business conditions a firm will face several years in the future.  New competition, new products, changing consumer preferences, and an uncertain economy all serve to make it difficult to forecast future corporate profits and dividends.

3.  A variety of factors can affect the return you will earn from holding shares of common stocks.

• Unexpected inflation, rising interest rates, and deteriorating economic conditions can each be expected to have a negative impact on most common stock values.  
• In addition, the shares of small, little-known companies may be difficult to sell without accepting a large price penalty.  

As investors discovered during the stock market meltdown of 2008, risk is an important issue to consider if you plan to invest in common stock.

A quick look at MYEG (22.4.2010)

My E.G. Services BHD Company

Business Description:
My E.G. Services BHD. The Group's principal activities are developing and implementing Electronic Government Services project and providing other related services. It also operates as an investment holding company. Operations are carried out wholly in Malaysia.

Wright Quality Rating: LBNN Rating Explanations

A quick look at MYEG (22.4.2010)
http://spreadsheets.google.com/pub?key=tdVSwe6o2iz4DJ2U8bjPxqg&output=html


More details:

MY E.G. SERVICES BERHAD
STATUS : ACTIVE
COUNTRY Malaysia
SIC CODE CMP PROCESSING,DATA PREP SVC (7374)
10TH FLOOR MENARA HAP SENG, NO 1 & 3 JALAN P RAMLEE, KUALA LUMPUR
Tel: (60) 3 2382 4288
Fax: (60) 3 2382 4170

PROFILE BRIEF
My E. G. Services Berhad (MYEG) is principally engaged in the Electronic Government (E-Government) and Electronic Services (E-Services) industry. MYEG operates in two business divisions Government to Citizen (G2C) and Government/Enterprise Solution (GES). G2C services refers to services, such as driving theory test bookings, issuance and renewal of licenses, electronic bill payment and payment, as well as online information services, such as traffic summons checking and electronic bankruptcy or liquidation status searches. GES are non-Internet-based services, such as software and enterprise solutions, system development and maintenance, as well as services rendered at the E-Services Centers. These services are non-Internet-based and cannot be transacted by citizens independently.

DIRECTORS/ADVISORS
COB NORRAESAH BINTI HAJI MOHAMAD
CEO/MD/PRESIDENT THEAN SOON WONG
AUDITOR HORWATH

An Overview of the Stock Exchange

An Overview of the Stock Exchange

There are few words in the English language that can inspire more fear than the words, "Wall Street". Viewed as both the ultimate get-rich-quick location and a boulevard of broken dreams, "The Street" is littered with the hopes, dreams, and finances of many an unwise investor. Perhaps this is the reason that so many people are afraid to invest in the stock exchange... they like the thought of being able to invest, but too many horror stories have them falling ill at the mere thought of it.

In truth, however, the stock market is only scary if you let it be. 

Looking at the stock market (aka "Wall Street", "The New York Stock Exchange", etc.) from a logical standpoint helps to take a lot of the fear and loathing out of it. 

• Yes, there are a lot of investors who have literally made millions overnight playing the market. 
• There are also a much greater number of investors who have lost that much or more in the same amount of time. 
• Right in the middle, though, is where most people end up... no great gains, no great losses, just an average portfolio that lets them put aside their invested money for months or years until they need it. 

But let's take the first thing first... what exactly is the stock market? Basically, the stock market is a marketplace like any other, but instead of buying tangible goods such as produce or supplies the investors purchase pieces of publicly-owned companies.

As a quick example, let's look at Wal-Mart. Wal-Mart is a publicly-traded company, public citizens can purchase portions of ownership in the company (also known as "shares"). Most publicly-traded companies have billions of shares or more, so most people can freely invest their money into these companies without worrying about the company running out of shares.

• If the company does well financially, more people will want to buy those shares and the price of the shares will go up. As the price of the shares goes up, the shareholders will make money. 
• Alternately, when the company does poorly or is wracked with scandal, then people don't want to buy it (and want to get rid of what they have) and the price will go down, sometimes drastically (think Enron.) 

Due to this fluctuation in prices depending upon the actions of the company, there is a great potential to both make and lose money without much effort.

The popular saying, "Buy low, sell high," is some of the best advice that anyone can give, if you have an opportunity to follow it.

• When a company has potential or is doing well and is reasonably priced, it can be a good investment to buy as much as you want or can afford and hope that the prices rise. 
• If a company reaches its peak or starts to perform poorly, sell off at least some of what you own for a profit, and then watch to see if prices fall.  
• (There is another option, of course... don't sell the shares and see if the stock recovers at a later date. This can sometimes be your best option if you're investing long-term or as part of a retirement plan, but in some cases the company is unable to recover or goes out of business.)

In addition to "buy low, sell high", another common phrase in dealing with the stock market is "diversify your portfolio." Though diversifying can seem a bit confusing at first, it basically means that instead of buying all of your stocks as a single type, you should buy a variety of different stocks and bonds in a variety of different industries. That way, if one type of stock starts doing poorly (such as telecommunications companies), then you'll be leveled out by another section that's showing an increase in prices (such as biotechnology). 

Of course, there is more on the stock exchange than just publicly-traded companies. In addition to company stocks, you can also buy bonds in futures (bonds that are usually based upon perishable goods and are estimates of how well they will do at some specific future time), government bonds (kind of like savings bonds, but are based in various government programs), and indexes (based upon an average of prices for the indexed product, such as diamonds or precious metals.) Indexes and government bonds are especially useful when diversifying, as they are generally much more stable than other forms of the market.

The most important thing that you need when deciding to invest is a little bit of common sense.

• If something sounds too good to be true, be wary of it; if you're looking to get rich quick, you're looking in the wrong place. 
• Be smart, research stocks and bonds, and keep an eye on your money. 
• Invest with long-term goals in mind, and try not to freak out when one or two of your stocks take a temporary dip. 
• There is money to be made in the stock market, as long as you allow it to happen.

http://www.associatedcontent.com/article/2981/playing_the_stock_market.html?cat=3

How to Understand the Stock Market

Stock Market 101

The Stock Market started over a hundred years ago when Mr. Dow and Mr. Jones realized that every company could offer shares of itself to the public for sale. As a company prospered, so would the public that owned shares of its stocks.

There are, obviously, many companies. But a good barometer of the overall market would be a few very large and stable companies which would indicate how most companies were doing simply by how the few were doing.


This small group of 30 companies, thirty major industries of the United States, was named in honor of Mr. Dow and Mr. Jones as the Dow Jones Industrial Average, the DJIA.


Often referred to as "The DOW," or "Dow Jones," these thirty companies are such well-known names as MacDonald's, General Electric, Disney, etc. To own stock in these companies, you would buy shares from the New York Stock Exchange, the NYSE. You wouldn't have to go to New York, of course. You'd simply tell your stockbroker to buy 100 shares of MCD or 15 shares of GE or 12,000 shares of DIS, for example.


Such an abbreviation would serve as a symbol and made more sense than spelling out the whole company name. That would take up too much space on the ticker. In the early days, you'd have a little machine that fed out a constant tape-sized paper stream of the changing stock prices. The machine would make an audible "tick" as the tape emerged from the machine ... tick ... tick ... tick ... and you'd see what price was now being quoted for GE ... 62.50, or GM ... 77.25, etc. ... all from the convenience of your stock ticker.


If you couldn't afford a stock ticker, you could read your stock quotes right from the business section of the newspaper. Nowadays, it's easy to have a stock ticker right on your computer, and you can even customize it to show only the stocks you want to see ... those in your portfolio.


In the early days, and even now, the NYSE was a madhouse of activity as buyers and sellers would shout their requests from the trading floor, complete with verifying hand signals. Many decades after the NYSE began, certain newer companies chose to be listed on a new sort of stock exchange, where there would be no buyers and sellers shouting from an "open pit" such as the NYSE.


This newer stock exchange would simply take buy and sell orders over the phone or other means and automatically display the current stock price quotes. Thus, a more sensible approach was born, with the National Association of Securities Dealers, Automated Quotient (NASDAQ).


Unlike the two-letter abbreviation of GE or the three-letter symbol of MCD, those on the NASDAQ use four-letter symbols, such as INTC (Intel Corporation) or AAPL (Apple Computer) or YHOO (Yahoo). Our third stock exchange is the AMEX (American Exchange), and their symbols are in three letters, such as AZC (Azco Mining) and FKL (Franklin Capital). You'll see these stock symbols and thousands more in the business section, and you'll see them on the internet.


So, why should anyone invest in the stock market? 

• Because history shows that the stock market earns more money than that in a bank account or in Certificates of Deposit (CD's) or Money Market Funds, or Government Treasury Bills (T-Bills). 
• Occasionally, as in 1980, when interest rates were over ten percent, it's wiser to have your money in a bank than in the stock market. But that period didn't last long. By 1982, it was time to get out of the bank and back into the stock market again.

Most of the time, the interest you earn in a bank account is very small. In 2005, it was only about one percent. If you'd invested $1000 in a bank, you'd have had ten dollars profit at the end of a year. But if you'd put that $1000 in the stock market, you'd likely have had at least $40 profit (a 4% return) ... and maybe as much as $300 (a 30% return).


Indeed, history shows that stocks earn an average 11% per year, even despite periods like 1929 or 1962 or 1974 or 1987. Plus, there was one period, from 1999 to 2003, when stocks had their biggest "Bull" run in history ... five straight years of 30% gains each year ... an amazing time for investors. There are times, of course, when the stock market seems more like a sleeping Bear than a charging Bull, and your portfolio of stocks falls in value as stock prices fall.


Sure, it's a gamble, much like a bet in Las Vegas. But America's companies don't usually go out of business. While some do, most well-known names and others with equally strong market presence will continue through good times and bad, earning that steady average of 11% per year.


When times are good for the market, the painless way to invest is simply to put your money in a fund that covers the entire market - for instance, the Vanguard Total Stock Market Index (VTSMX). Or, to bank on the largest companies only, buy the Standard & Poor's index of 500 stocks, better known as Spyders (Amex: SPY), Standard & Poor's Depositary Receipts. Other index funds also invest in market sectors such as MDY (for Mid-Caps), DIA (known as "Diamonds" - of the DowJones Industrial Average), and many others. These index funds are traded on the stock exchange just like a share of stock and are thus known by the convenient acronym : ETFs (exchange-traded funds). a complete list and performance comparison can be found at many internet sites such as www.Morningstar.com, for example.


Good times for the market will also urge a bet on the Technology (Tech) sector, with focus on computers and related companies. That would be the NASDAQ 100 (AMEX: QQQ) or other similar funds. And, if you feel the market is DEFINITELY going to go up tomorrow, buy a beta-leveraged fund such as Potomac Over The Counter Index Plus (POTCX) or Profunds Ultra Bull (ULPIX) or Profunds Ultra OTC (UOPIX). If you think the market is going to go down tomorrow, buy a leveraged bear-market fund, such as Profunds Ultra Bear (URPIX) or Ultra Short OTC Inv (USPIX), or Potomac Ultra OTC Short (POTSX), and you'll make money when others are losing.


Stockbrokers used to charge a lot of money to buy or sell stocks for you. With the advent of the internet, and fierce competition between them, you can now trade stocks much easier and cheaper than ever before. Go to a broker like Charles Schwab; it'll cost you a few thousand to open an account and you'll pay $30 per trade (buy or sell). The cheapest is, probably, Scottrade, which charges only $7. Simply go to a Scottrade office (they're all over), give them a check for $500, and you can begin trading stocks from the comfort of your own home, right on your computer (www.scottrade.com).


If you'd like to practice a little, first, for free, go to a site called www.SmartMoney.com and try out a few portfolios to see how they do. The main thing is, to get started taking charge of your finances, making your own decisions about your own investments and your own future, and learning how to earn more money than any bank account could ever earn you.

Written by Jonathon Burket

http://www.associatedcontent.com/article/27074/how_to_understand_the_stock_market.html?singlepage=true&cat=3

A quick look at Nestle (21.4.2010)

Wright Quality Rating: CBA9 Rating Explanations


A quick look at Nestle (21.4.2010)
http://spreadsheets.google.com/pub?key=tSYotvXtbcoj2isROy_VY_g&output=html

Nestle 1Q net up 38% to RM138.8m
Written by The Edge Financial Daily
Wednesday, 21 April 2010 19:03

KUALA LUMPUR: NESTLE (M) BHD [] posted net profit of RM138.79 million in the first quarter ended March 31, 2010, up 38% from RM100.35 million a year ago as its gross margins were boosted by better quality product mix and some exceptional items.

It said on Wednesday, April 21 the turnover edged up 3.7% to RM1.02 billion from RM983.93 million. Earnings per share were 59.19 sen versus 42.79 sen.

Nestle said during the challenging economic environment last year, Nestle continued to focus on its long-term strategy of investing in manufacturing lines to increase production capacity and building its brands.

"This has positioned Nestlé to benefit from the improving local and global economy," it said.

It said the group's concerted efforts to embark on tactical marketing campaigns helped boost domestic sales by 6.2% against prior quarter, and were higher by 0.7% against the same period last year.

"Contributions from the exports sector, which constitute 23% of total sales, recorded a double-digit growth and also added to the higher turnover. The growth was mainly contributed by sales of Nescafe products manufactured from the new lines invested last year and non-dairy creamer," it said.

A quick look at C.I. Holdings (21.4.2010)

C.I. Holdings Berhad Company

Business Description:
C.I. Holdings Berhad. The Group's principal activities are manufacturing, selling, bottling, marketing and distributing beverages. Under exclusive franchise, the Group produced brands, such as Pepsi, Mirinda, 7-Up, Gatorade, Lipton, Tropicana and Evervess. It also manufactures its own brand of drinks under the trademarks of Chill, Excel, Frost, Bleu and Shot. Other activities include manufacturing and trading water taps and other plumbing accessories, dealership and distribution of household fittings and appliances and manufacturing of ceramic sanitary wares. It is also involved in provision of management and engineering services, as well as operating as an investment holding company. Operations are carried out predominantly in Malaysia.





Wright Quality Rating: LBC1 Rating Explanations


A quick look at C.I. Holdings (21.4.2010)
http://spreadsheets.google.com/pub?key=t-txsPY_B8VmtaJsbgEzXXg&output=html


CIMB Research ups CI Holdings TP to RM3.28
Written by CIMB Equities Research
Thursday, 22 April 2010 09:39
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KUALA LUMPUR: CIMB Equities Research raised the target price for CI Holdings Bhd from RM2.63 to RM3.28 pegged to an unchanged 20% discount to its 15x target market P/E in view of the stock’s relatively low liquidity.

"CI Holdings remains firmly a BUY, with the re-rating catalysts being
1) the strong 3Q performance,
2) an increasingly marketable product line, and
3) additional production capacity.

Dividend yields are decent at 4-6%," it said on Thursday, April 22.

The research house said CI Holdings impressed it with its record 3QFY6/10 net profit of RM10.9 million, which took the nine-months bottomline to RM26.8 million, just 4% shy of its full-year forecast.

"This is the fourth straight quarter of results outperformance. This time around, it appears that we had underestimated the Chinese New Year sales volume. Taking our cue from the 3Q performance and additional production capacity, we raise our FY10-12 EPS forecasts by around 25%," it said.

CIMB Research also raised its DPS forecasts from 10 sen to 11 sen for FY11 and 12 sen for FY12 while maintaining its FY10 forecast of 10 sen.

World trade to grow 9.5%

Mar 26, 2010

'This means that trade-wise, there is light at the end of the tunnel and it's certainly a good forecast, good news for the world economy,' head of the World Trade Organisation Pascal Lamy said. -- PHOTO: REUTERS

GENEVA - WORLD trade is expected to grow 9.5 percent in 2010, after suffering its biggest collapse since World War II in 2009, the head of the World Trade Organisation Pascal Lamy said on Friday.
'Our economists are forecasting a world trade growth for 2010 of 9.5 per cent with developing countries' trade growing 11 per cent and industrialised countries' trade growing by 7.5 per cent,' the WTO director-general said.

'This means that trade-wise, there is light at the end of the tunnel and it's certainly a good forecast, good news for the world economy,' he added. World trade plunged 12 per cent in 2009 due to a 'sharp contraction in global demand' during the economic crisis.

Amid last year's slump, China overtook Germany to become the world's top exporter with some US$1.20 trillion (S$1.68 trillion) worth of merchandise exported in 2009, according to WTO data. Germany exported US$1.12 trillion of merchandise, while the world's biggest importer, the United States, was in third place with US$1.06 trillion worth of exports last year.

The WTO noted that the trade slump last year was particularly magnified by the 'product composition of the fall in demand, by the presence of global supply chains, and by the fact that the decline in trade was synchronized across countries and regions.'

Underlining the scale of the downturn, Patrick Low, chief economist at the WTO, said that the projected growth of 9.5 per cent this year would need to be repeated in 2011 in order for the global economy to recover to peak trade levels reached in 2008 before the crisis struck. The economist warned that the 2010 forecast could yet prove over-optimistic if currency and commodity prices were to show wild swings, or if the financial markets were to show other adverse developments. -- AFP

A quick look at KAF (21.4.2010)

KAF-Seagroatt & Campbell Berhad Company

Business Description:
KAF-Seagroatt & Campbell Berhad. The Group's principal activity is providing stockbroking and related services, such as nominee services, safe custody and management of securities. It also operates as an investment holding company. Operations are carried out in Malaysia.




Wright Quality Rating: LLL0 Rating Explanations

A quick look at KAF (21.4.2010)
http://spreadsheets.google.com/pub?key=tt-FqSCZJ3t_dmBwyJhwEwQ&output=html

KAF-Seagroatt posts RM2.39m net profit in 3Q10
Written by Melody Song
Tuesday, 20 April 2010 21:20

KUALA LUMPUR: KAF-SEAGROATT & CAMPBELL BHD [] saw net profit for the third quarter ended Feb 28, 2010 rise to RM2.39 million from a net loss of RM37,000 a year earlier.

Revenue for the quarter was up 123.2% to RM6.63 million from RM2.97 million previously, while earnings per share was 1.99 sen from loss per share of 0.03 sen.

The company, which is principally involved in stockbroking and related services in Malaysia, did not disclose reasons for its performance other than saying its results were dependent on the performance of the local securities market.

For the nine-month period, net profit was RM15.95 million from net loss of RM15.09 million a year earlier while revenue was 80.5% higher at RM23.38 million from RM12.95 million.

Cumulative earnings per share was 13.29 sen from loss per share of 12.58 sen. It proposed an interim dividend of 7.50 sen gross for the current financial year to be paid on May 19.

(The Edge)

Intrinsic Value is understood to be that value which is justified by the facts, e.g. the assets, earnings, dividends and definite prospects.

Before you risk your hard-earned money on a stock, you probably want to know the value you can expect to get in return.  The value you assign to a stock, or that stock's intrinsic value, is the maximum amount that you are willing to pay now for future benefits, which could come from dividends or the potential sale of the stock at a realistic future price.  

It makes no sense to buy a stock when its intrinsic value is smaller than the current price.

Buffett cautions:  "The calculation of intrinsic value, though, is not so simple .... intrinsic value is an estimate rather than a precise figure."

Computing Intrinsic Value

Individuals differ from one another in assessing companies' future prospects.  They also differ in their risk tolerance.  Hence, it should be no great leap to accept that there is no unique intrinsic value that can be assigned to a common stock upon which everyone will agree.  In computing intrinsic value, you should start by examining a company's balance sheet.

• Some assets, such as cash and investments in marketable securities, are reported at market value.  As a first approximation, the intrinsic value of such items can be taken to be the same as their market values.  
• For most companies, however, the major component of intrinsic value comes from their future earnings.

Valuation of future earnings

For valuation of future earnings, you can

1. Start with estimating a growth rate based on your evaluation of the company's past performance.  
2. Then you can apply the estimated growth rate to current earnings to approximate expected earnings for a future year, say, 10 years from the current year.  
3. Finally, apply a P/E multiple to the future earnings per share to estimate the value of those earnings in the future and discount them to their present value.  
4. In addition, dividends should be properly accounted for.

While it is a simple approach, it requires many assumptions.

• For example, you may have to adjust reported earnings in an attempt to obtain underlying or sustainable earnings.  
• You also need to assume a growth rate, a P/E multiple, and a discount rate.  

With this approach, it is important to know the company's business well for you to come up with reliable estimates.

For example:

It is important to learn a lot about the company so that you may consider the appropriate method for computing its intrinsic value.  You should invest only when the margin of safety is high.

Company A:  This is easy to evaluate because most of its assets are in marketable securities.  Earnings play a limited role in this company's intrinsic value.

Company B:  This company's value is driven primarily by its earnings.  


Read also:

Intrinsic value described by Ben Graham in Security Analysis.

****How to identify Growth Stocks? You should not try to identify a growth stock using financial ratios alone.

Wal-Mart has been a great growth stock, giving an 80,000 percent return over a 38-year period since 1970, when shares first became publicly available, or an incredible 35% per year.



How to identify Growth Stocks?

The success of a business, and hence its growth, depends primarily on its customers.  To find a great growth business, you need to evaluate it from a customer's point of view.  Once you are satisfied that the company's sales and earnings will continue to grow and that you can buy the stock at a reasonable price, buy and hold it for a long time.



Here is an important lesson:  How NOT to identify Growth Stocks?

Let's start with how NOT to identify a growth stock because it is especially important if you have been considering value investing.

You should not examine the financial fundamentals immediately after you have discovered a company that may grow in leaps and bounds for many years.  Do not emphasize the fundamentals much.

• In other words, when you start thinking about a growth stock, do not start thinking about the historical P/E ratio or, for that matter, any other quantitative measure that you might have learned in business school.  
• If you start thinking about traditional financial ratios, you will start thinking of value stocks, and you will probably never pick a great growth stock.  You would never have picked shares in Microsoft, Wal-Mart, or Home Depot if you had looked at the fundamentals soon after the companies went public.  
• Even if you knew these were incredible companies, you would have missed their tremendous potential.

We are not suggesting that traditional financial ratios are not important; we are simply suggesting that you should not try to identify a growth stock using financial ratios alone.